Fill and Sign the Ii Pses Strategy for Its Compensation and Benefit Programs is Form

PUGET SOUND POWER & LIGHT COMPANYLONG TERM INCENTIVE PROGRAMFOR SENIOR MANAGEMENT SECTION 1. Purpose. This Program is designed to encourage the long term success of the Company for the benefit of its customers, employees and shareholders, by offering senior management a stake in that success. The Program consists of two Plans (the “Plans”): the Stock Appreciation Rights Plan (“SAR Plan”) and the Performance Share Plan (“PS Plan”). Amounts realized from awards under each of the Plans depend on the Company s financial performance. SECTION 2. Administration . Both Plans will be administered by the Compensation and Retirement Committee (the “Committee”) of the Board of Directors of the Company (the “Board”). The Committee shall be composed of members of the Board who are “disinterested persons,” i.e., persons who are not otherwise eligible to participate in the Plans, and who meet the definition of a “disinterested person” set forth in the rules and regulations promulgated under Section 16 (b) of the Securities Exchange Act of 1934. Except for the terms and conditions explicitly set forth in this Program, the Committee shall have the authority, in its discretion, to determine all matters relating to each award to be granted under the Plans, including selection of the individuals to be granted awards, the establishment and modification of criteria for awards, and all other terms and conditions of the awards. Awards granted under the Plans need not be identical in any respect, even when made simultaneously. The interpretation and construction by the Committee of any terms or provisions of this Program or the Plans or any award issued under the Plans, or of any rule or regulation promulgated in connection herewith, shall be conclusive and binding on all persons. SECTION 3. Eligibility. Awards under the Plans shall be made by the Committee to those officers of the Company (and this may include officers also serving as Company directors) who are primarily responsible for the Company s long term financial performance, as determined from time to time by the Committee. SAR PLAN SECTION 4. Units. For purposes of the SAR Plan, a stock appreciation right (“SAR”) is a unit of value equal to the sum of(a) the closing market price of one share of the Company s common stock on the New York Stock Exchange at the close of business on the business day immediately preceding the date on which the SAR is exercised (the “Exercise Base Date”) less such closing market price at the close of business on the business day on which the SAR award is made (the “Award Base Date”), plus (b) the aggregate dividends due shareholders with respect to one share of the Company s common stock from and including the Award Base Date to and including the Exercise Base Date, less the aggregate dividends that would have been due shareholders on one such share during such period if the dividend rate in effect on the Award Base Date had been the dividend rate in effect throughout such period: provided, that the amount determined under this clause (b) shall not be less than zero. The maximum number of SAR units that may be awarded under the SAR Plan is one million.SECTION 5. SAR Awards. The Committee may award SARs at any time or times to such officers of the Company and in such numbers as it may determine, subject to the terms of the Program and this SAR Plan. SAR awards that have been forfeited or that terminate for any reason shall thereupon again be available for the purposes of the SAR Plan. SECTION 6. Term and Maturity. The maximum term of each SAR award shall be ten years from the date it is granted. To ensure that the Company will achieve the purpose and receive the benefits contemplated in this SAR Plan, any SARs granted to any officer hereunder (a “Holder”) shall, except as otherwise provided herein or unless the condition of this sentence is waived or modified by the Committee, be exercisable according to the following schedule: Period of Holder s Continuous Relationship with the Company from the Award Base Date Portion of SARs Which are Exercisable after 1 year 20% after 2 years 40% after 3 years 60% after 4 years 80% after 5 years 100% SECTION 7. Exercise. Subject to the vesting schedule described in Section 6 above, the SARs awarded to a Holder in any year may be exercised in whole or in part: provided, that no fewer than twenty percent (20%) of the SARs awarded in any year (or the remaining SARs then exercisable, if less than twenty (20%) percent) may be exercised at any one time. During a Holder s lifetime, any SARs granted under the SAR Plan are personal to him or her and are exercisable solely by such Holder. SARs shall be exercised by delivery to the Company of written notice of the number of SARs that the Holder intends to exercise. PS PLAN SECTION 8. Units. For purposes of the PS Plan, a performance share unit (“PSU”) is a unit of value equal to the sum of(a) the average closing market price of one share of the Company s common stock on the New York Stock Exchange for each day on which such Exchange is open during the month of December (the “Measuring Month”) in the third calendar year following the year in which the PSU award is made, plus (b) the sum of the dividends due shareholders with respect to one share of the Company s common stock from January 1 of the year in which the PSU award is made to and including the last day of the Measuring Month. For example, with respect to awards made in 1988, if the average daily closing price of one share of Company common stock during December 1991 (the Measuring Month) is $25, and if the sum of the dividends due shareholders with respect to one such share from January 1, 1988 through December 31, 1991 is $7.16, then the value of PSUs awarded in 1988 would be $32.16, the sum of $25 and $7.16. SECTION 9. Adjustments. Each award of PSUs pursuant to the PS Plan shall be subject to each of the following adjustments, to be made in the order indicated. The adjustments are expected to have the effect of either increasing or decreasing the number of PSUs that are initially awarded in any year to any officer (a “Holder”). All adjustments shall be carried to two decimal places. First, Book Value Adjustment. The book value per share of the Company s common stock shall be determined from the audited books and records of the Company as of December 31 of the year prior to the year in which each PSU award is made, and for each of the four succeeding years. The percentage increase or decrease from year to year in such book value per share shall be determined from such audited books and records, and the mathematical sum of those percentages shall be divided by four, to obtain the average annual increase or decrease in book value per share. The number of PSUs initially awarded to each Holder in such year shall be multiplied by a fraction that corresponds to the average change in book value, as established by the Committee for each award. For example: If the Average Percentage The Number of PSUs Initially Awarded Is Increase in Book Value Is: Multiplied by the Fraction Indicated* 1.40 * 1.20 * 1.00 * .67 * .33 * .00 *To be determined by the Committee for each award. If the average percentage increase falls between those determined by the Committee for any award, the fractional multiplier shall be determined by interpolation. Second, Relative Market-to-Book Ratio Adjustment. The ratio of the market value of the Company s common stock to its book value shall be determined and compared with similar ratios for other electric utility companies in the United States using data published by Kidder Peabody & Company or, if such data is not available in an appropriate form, such Company- collected data as the Committee may from time to time select. The Company s average monthl y percentile rank (“Average Percentile Rank”) among such companies shall then be determined for the 48-month period commencing with the month of January in the year in which the PSUs are awarded, with the highest relative market-to-book ratio equaling the 100th percentile. The number of PSUs awarded to a Holder in any year, after the adjustments provided for in the preceding clause of this Section 9, shall be multiplied by the fraction, as established by the Committee for each award, that corresponds to the Company s Average Percentile Rank during such 48-month period. For example: If the Company s Average The Number of PSUs Is Multiplied Percentile Rank Is: by the Fraction Indicated *1.40 * 1.20 * 1.00 * .80 * .60 *To be determined by the Committee for each award. If the Average Percentile Rank falls between those determined by the Committee for any award, the fractional multiplier shall be determined by interpolation. The Committee may, at the time of any award of PSUs, change either or both of the adjustment formulas to reflect conditions existing at that time so that the Program may achieve its purpose. Moreover, if the Committee at any time or times determines that the adjustments to the number of PSUs awarded as determined under the preceding clauses of this Section 9 produce a result that is inconsistent with the purpose of the Program, the Committee may make such modifications to the adjustments as it deems appropriate. SECTION 10. PSU Awards. The Committee may award PSUs at any time or times to such officers of the Company and in such numbers as it may determine, subject to the terms of the Program and this PS Plan: provided, that except in unusual circumstances the Committee will not award PSUs to any officer more frequently than once in every second year, in order that individual performance may be measured against longer-term objectives of the Company. The maximum number of PSUs that may be awarded under the PS Plan is two hundred thousand. Adjustments to PSUs pursuant to Section 9 hereof shall not affect the two hundred thousand unit maximum. PSU awards that have been forfeited or that terminate for any reason shall thereupon again be available for the purposes of the PS Plan. SECTION 11. Maturity and Payment. A PSU award matures on December31 of the third year after the year during which the award is made, and it becomes payable to the Holder by on or before April 1 in the fourth year following the year in which the award is made. For example, if a PSU award is made in February 1988, it will mature on December 31, 1991; its value will be determined pursuant to Section 8 and 9 hereof as of December 31, 1991; and the award will be payable to the Holder by on or before April 1, 1992. PROVISIONS COMMON TOSAR PLAN AND PS PLAN SECTION 12. Non-transferability. SARs and PSUs awarded under the Plans, and the rights and privileges conferred thereby, may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will or by the applicable laws of descent and distribution, and shall not be subject to execution, attachment, or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any SAR or PSU awarded under the Plans, or of any right or privilege conferred thereby, contrary to the provisions thereof or hereof, or upon the sale or levy or any attachment or similar process upon the rights and privileges conferred thereby, such SAR or PSU shall thereupon terminate and become null and void. SECTION 13. Deferral. Any officer of the Company, having received advice that he or she may be or become eligible to receive an award of SARs or PSUs, and (on terms established from time to time by the Committee in its sole discretion) any Holder, may by written notice to the Committee, in a form approved by the Committee, elect to defer receipt of all or part of any SAR award, any PSU award, or any combination thereof approved by the Committee, to a date or dates subsequent to the date for payment established pursuant to the SAR Plan or PS Plan. Deferred amounts shall bear interest from the date on which the deferral becomes effective to the date or dates of payment pursuant to the election, at the same rate as is applicable over the term of such deferral to amounts deferred under the Company s Deferred Compensation Plan. Any election to defer payment hereunder shall be irrevocable, except that the Committee may in its sole discretion permit changes in the deferral election on application of the Holder but only for good cause shown. SECTION 14. Termination of Employment. If a Holder terminates his or her employment with the Company for any reason other than death, total disability, or retirement under the Company s Retirement Plan, the Holder s SARs and PSUs shall terminate at the time of such termination of employment as to all SARs to the extent they have not theretofore vested and all PSUs which have not theretofore matured: provided, that the Holder shall have three months from the date of such termination in which to exercise SARs to the extent that they were vested on the termination date; and the Company shall by on or before the next succeeding April 1 pay to the Holder (subject to Section 13 hereof) the amount of any PSU awards that had matured at the time of such termination; further provided, that with respect to a Holder whose employment with the Company is terminated by the Company on the grounds of either clear and intentional misconduct detrimental to the interests of the Company, or commission of a felony, all such Holder s unpaid SARs and PSUs, whether or not vested or matured, shall be immediately cancelled and neither the Holder nor any person claiming by or through the Holder shall have any right to payment in respect thereof. 14.1 Retirement. If a Holder s employment with the Company terminates by reason of his or her retirement under the Company s Retirement Plan, either at normal retirement age or pursuant to approved early retirement, SARs shall continue to be exercisable by the Holder for a period of one year from the date of retirement (but only to the extent vested on the retirement date), and PSUs shall continue towards maturity, subject to the terms and conditions of the Program and the Plans, as if the employment relationship had not terminated; provided, that PSUs shall mature on December 31 of the year in which the retirement occurs, and shall be payable by on or before the following April 1. If maturity of a PSU as a result of retirement occurs prior to December 31 of the third year after the year during which the PSU award is made, such award shall be deemed to mature on December31 of the year in which such retirement occurs, and the performance goals under Section 8 hereof, and the adjustments under Section 9 hereof, shall be proportionately adjusted by the Committee to reflect the actual number of years from January 1 of the year in which the award was made to the date of maturity.14.2 Death or Disability. If a Holder s employment with the Company terminates by reason of total disability or death (or if the Holder dies during the twelve month period following a determination of total disability hereunder), all SARs held by such Holder immediately vest and may be exercised by the Holder, within one year of the date of total disability or in the event of the Holder s death, within one year of the date of death by the personal representative of the Holder s estate or by the person or persons to whom the Holder s rights under the SARs pass by will or by the applicable laws of descent and distribution (the “Beneficiary”); and PSUs held by such Holder shall be paid to the Holder or (in the event of the Holder s death) to the Beneficiary at the time that, but for such death, they would have been paid to the Holder: provided that if the PSU Holder s death or total disability occurs prior to December31 of the third year after the year during which the PSU award is made, such award shall be deemed to mature on the December 31 next following the Holder s death or total disability, and the performance goals under Section 8 hereof, and the adjustments under Section 9 hereof, shall be proportionately adjusted by the Committee to reflect the actual number of years from January 1 of the year in which the award was made to the date of maturity. As used in this Program, the term “total disability” refers to a mental or physical impairment of the Holder which is expected to result in death or which has lasted or is expected to last for a continuous period of twelve (12) months or more and which causes the Holder to be unable, in the opinion of the Company and an independent physician, to perform his or her duties as an officer of the Company and to be engaged in any substantial gainful activity. Total disability shall be deemed to have occurred on the first day after the Company and an independent physician have furnished opinions of total disability to the Committee. 14.3 Related Corporations. For purposes of this Program: (I) a transfer of employment or other relationship between or among the Company and any related corporation shall not be deemed to constitute a cessation of employment with the Company; (2) employment shall be deemed to continue while the Holder is on military leave, sick leave or other bona fide leave of absence (as determined by the Committee); but the foregoing notwithstanding, employment shall not be deemed to continue beyond the first ninety (90) days of such leave, unless the Holder s reemployment rights are guaranteed by statute or contract; and (3) a Holder s relationship with the Company shall not be considered to have terminated while the Holder remains an employee or a director of the Company. In this Program, the term “related corporation” shall mean any corporation in an unbroken chain of corporations with the Company if, at the time of the granting of the SAR or PSU, either (a) stock possessing in the aggregate fifty percent (50%) or more of the total combined voting power of all classes of stock in the corporation is owned by the Company or by any other corporations in such chain, or (b) stock possessing in the aggregate fifty percent (50%) or more of the total combined voting power of all classes of stock in the Company is owned by such corporation or by any other corporations in such chain.SECTION 15. Status as Shareholder. Neither the Holder nor any person or persons to whom the Holder s rights and privileges under the Plans may pass shall be, or have any of the rights or privileges of, a shareholder of the Company with respect to any SAR or PSU. SECTION 16. Continuation of Employment. Nothing in the Plans or in any SAR or PSU granted pursuant to the Plans shall confer upon any Holder any right to continue in the employ of the Company or of a related corporation, nor to interfere in any way with the right of the Company or of any such related corporation to terminate his or her employment or other relationship with the Company at any time. SECTION .17. Modification and Amendment of SAR or PSU. Subject to the terms and conditions, and within the limitations of this Program, the Committee may modify or amend outstanding SARs and PSUs granted under the Plans. The modification or amendment of an outstanding SAR or PSU shall not, without the consent of the Holder, alter, impair or diminish any of his or her rights or any of the obligations of the Company under such SAR or PSU. SECTION 18. Effect of Dissolution or Reorganization. Upon dissolution or liquidation of the Company or upon a merger or consolidation of the Company with one or more corporations (collectively, a “Triggering Event”) as a result of which the shareholders of the Company receive cash, stock or other property in exchange for their shares of common stock, any SAR granted hereunder shall terminate, but the Holder shall have the right immediately prior to any Triggering Event, to exercise his or her SARs in whole or in part whether or not the vesting requirements set forth in the SAR Plan have been satisfied; and any PSUs held by such Holder shall be deemed to have matured on the date of such Triggering Event. The month in which the Triggering Event occurs (excluding, however, any days in such month after the day on which the Triggering Event occurs) shall be the Measuring Month for purposes of Section 8 hereof, and the number of PSUs initially awarded to each Holder shall be subject to the adjustments provided in Section 9, but with appropriate mathematical adjustments as determined by the Committee so that the adjustment for changes in book value, and the relative market-to-book adjustment, measure the adjustments for the period ending with the day on which the Triggering Event occurs. The number of PSUs as so adjusted shall then be reduced, by multiplying it by a fraction, the numerator of which is the number of months from January of the year in which the award is made to and including the month in which the Triggering Event occurs, and the denominator of which is 48. In the event of any adjustment in the number of the Company s shares resulting from any stock dividend, stock split, or similar event, the number of SARs awarded to a Holder and the number and value of and all adjustments to any PSUs awarded to the Holder, shall be proportionately adjusted by the Committee. Any fractional shares resulting from any adjustment in the number of shares related to any SAR or PSU shall be disregarded and each such SAR or PSU shall relate only to the number of full shares resulting from such adjustment. All such adjustments shall be made by the Committee, and its determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. SECTION 19. Amendment and Termination.19.1 Board Action. The Board may at any time suspend, amend or terminate this Program or the Plans. 19.2 Automatic Termination. Unless sooner terminated by the Board, this Program and the Plans shall terminate ten (10) years from the date on which this Program is adopted. No SAR or PSU may be granted after such termination, or during any suspension of this Program or the Plan. The amendment or termination of this Program or the Plans shall not, without the consent of the option holder, alter or impair any rights or obligations under any option theretofore granted under this Program or the Plans. SECTION 20. Effective Date. This Program shall become effective upon adoption by the Board. SECTION 21. New York Stock Exchange Rules. The Program is intended to meet certain rules of the New York Stock Exchange relating to when member organizations may give a proxy to vote stock without customer instructions. Therefore, the annual cost in any year to the Company of the Program, including the SAR Plan and the PS Plan, shall in no event exceed 10% of the Company s average annual income before taxes for the five-year period preceding such year. Puget Sound Power & Light Company 3/30/88